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Merchants win big debit card vote
The U.S. Senate rejects a delay for a substantial reduction in debit card fees.
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Topics: card not present, credit cards, debit cards, dodd-frank, Durbin Amendment, Federal Reserve, interchange, Javelin Strategy & Research, Jon Tester, MasterCard, Matthew Shay, National Retail Federation, online payments, payment cards, PIN debit, signature debit, U.S. House, U.S. Senate, Visa
The U.S. Senate took a vote today that could put hundreds of millions of dollars a year into the pockets of web retailers.
The Senate effectively rejected a measure that would have delayed for a year a Federal Reserve proposal to dramatically reduce the debit card fees retailers pay to banks. The proposal won 54 votes, well short of the 60 needed to head off an expected filibuster. With that delaying tactic off the table, the way is clear for the Federal Reserve to mandate lower fees July 21, the deadline set by the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted last year.
The proposal to delay implementation, put forward today by Sen. Jon Tester, a Montana Democrat, represented the culmination of an intense lobbying battle between banks trying to head off the debit card fees and merchants trying to make sure it takes effect.
The reaction from retailer trade groups to today’s vote was predictably triumphant. “This is a landmark victory for American consumers that will give them the break from skyrocketing swipe fees that they have been seeking for years,” says Matthew Shay, President and CEO of the National Retail Federation, a major retailer trade association. “Congress came to the right conclusion last year—hidden swipe fees charged by big banks have driven up prices far too much for far too long. The National Retail Federation and America’s retail merchants commend the Senate for standing by last year’s vote and for voting on the side of American consumers.”
In response to the mandate in last year’s Dodd-Frank bill, the Federal Reserve proposed in December a reduction in the debit card fees retailers pay to 12 cents a transaction. The NRF has estimated that the Fed proposal would cut merchants’ debit card fees by 70% and save retailers, online and offline, $14 billion a year.
But the savings are bigger in percentage terms for web retailers. That’s because online retailers are charged higher fees on debit and credit card transactions because the primary payment card networks that set interchange fees, Visa Inc. and MasterCard Worldwide, deem more risky what they call card-not-present transactions, that is, purchases not made face to face. This covers orders placed by phone as well as on the web. What’s more, in the bricks-and-mortar world consumers can pay with debit cards and enter a personal identification number, which routs the transaction through lower-cost networks than Visa and MasterCard. Online merchants, with a handful of exceptions, do not accept PIN debit and thus do not benefit from those lower fees.
What online merchants do accept is what Visa and MasterCard call signature debit. Visa’s debit interchange on a web transaction is 1.60% of the purchase amount plus 15 cents for most merchants, and slightly less for big e-retailers. MasterCard’s rates are similar.
Here’s the math. The average value of an online purchase made with a debit card is $78.70, according to research firm Javelin Strategy & Research, based on a September 2010 consumer survey. The e-retailer pays debit interchange on that transaction of about $1.40. If that fee were reduced to 12 cents, the retailer would save $1.28—money that goes right to the bottom line.
Javelin’s research further suggests that consumers use debit cards for 29% of online retail and travel purchases. Applying that percentage to the $165 billion in e-retail transactions in 2010, according to the U.S. Department of Commerce, that suggests that nearly $48 billion in web retail transactions were made with debit cards, or roughly 600 million purchases. At a saving of $1.28 per purchase, web retailers could cut their costs by roughly $750 million if the Fed sticks to its 12-cent proposal.